Abstract

Recent advances in healthcare information technologies allow healthcare providers to more accurately track patient characteristics and predict the future treatment costs of previously treated patients, which increases the scope for providers to quality discriminate across different patient types. We theoretically analyse the potential implications of such quality discrimination in a duopoly setting with profit-maximising hospitals, fixed prices and heterogeneous patients. Our analysis shows that the ability to quality discriminate tends to intensify competition and lead to higher quality provision, which benefits patients but makes the hospitals less profitable. Nevertheless, the effect on social welfare is a priori ambiguous, since quality discrimination also leads to an inefficient allocation of patients across hospitals.

Abstract

We study the optimal design of a public funding scheme in a mixed oligopoly setting (with applications to health care and education) with one welfare-maximising public provider and two profit-maximising private providers, where all providers compete on quality and where providers included in the public funding scheme are subject to price regulation. We find that the first-best solution cannot be implemented without including (at least) one of the private providers in the public funding scheme. However, inclusion of only one of the private providers is sufficient to induce the first-best outcome. Such inclusion allows for the elimination of a negative competition externality between the private providers that, all else equal, yields underprovision of quality.

Abstract

We study the strategic relationship between hospital investment and provision of service quality. We use a spatial competition framework and allow investment and quality to be complements or substitutes in patient benefit and provider cost. We assume that each hospital commits to a certain investment before deciding on service quality, and that investment is observable and contractible while quality is observable but not contractible. We show that, under a fixed DRG-pricing system, providers’ lack of ability to commit to quality leads to under- or overinvestment, relative to the first-best solution. Underinvestment arises when the price-cost margin is positive, and quality and investments are strategic complements, which has implications for optimal contracting. Differently from the simultaneous-move case, the regulator must complement the payment with one more instrument to address under/overinvestment. We also analyse the welfare effects of different policy options (separate payment for investment, higher per-treatment prices, or DRG-refinement policies).

Abstract

We analyse the effect of competition on quality provision in mixed markets, such as health care and education, where public and private providers coexist. We make two key assumptions about the public provider in such markets, namely that it faces a regulated price and is (partly) motivated. We find that increased competition has an a priori ambiguous effect on quality provided by the public provider, while the scope for a quality reduction by the private provider is larger. We also derive the first-best solution and show how it coincides with the Nash equilibrium of a private (symmetric) duopoly.